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Asia FX muted, dollar dull as rate-cut bets persist despite sticky CPI

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Asia FX muted, dollar dull as rate-cut bets persist despite sticky CPI
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Investing.com– Most Asian currencies tread water on Friday, while the dollar saw little strength as traders looked to U.S. interest rate cuts this year despite a stronger inflation reading for December.

Some positive data from China also helped sentiment towards the region, as Chinese grew more than expected, while (CPI) inflation picked up slightly in December.

The rose 0.1%, while the – which has heavy trade exposure to China, added 0.3%.

The firmed 0.3% after recovering sharply against the dollar on Thursday. Markets still expect the Bank of Japan to reiterate its ultra-dovish stance later this month.

Other data also pointed to sustained weakness in the Japanese economy, with the country’s falling more than expected in November.

Dollar steadies, takes little support from stronger CPI

The U.S. dollar took little support from overnight data that showed grew slightly more than expected in December which, coupled with recent signs of resilience in the labor market, gives the Fed less impetus to begin trimming rates early.

The and fell 0.1% each in Asian trade after ending Thursday’s session unchanged.

But traders appeared to have increased their bets that the Fed will begin cutting rates by as soon as March, at least according to the . The tool showed traders pricing in a 70.2% chance for a 25 basis point cut in 2024, up from the 64.7% chance seen a day ago.

Bets for an early rate cut persisted even as several Fed officials pushed back against such expectations, given that inflation remained sticky and well above the central bank’s 2% annual target.

“We are halfway through January, and markets are still pricing in a 70% chance of a March Fed cut. That simply looks wrong,” analysts at ING wrote in a note.

They noted that increased caution over the conflict in the Middle East and the upcoming Taiwan elections may be driving the seemingly abnormal moves in financial markets.

Chinese economic data shows some green shoots

Chinese inflation and trade data signaled some signs of recovery in Asia’s largest economy in December. CPI inflation rose slightly month-on-month, while exports grew more than expected.

But the country still faces an uphill battle in reaching pre-COVID levels of economic activity, as an economic rebound largely failed to materialize in 2023, despite the lifting of anti-COVID measures.

While the yuan rose on Friday, it was still nursing losses from 2023 and the first week of 2024. The currency had weakened in recent sessions despite a series of strong midpoint fixes by the people’s bank.

Focus is now on fourth-quarter Chinese data, due next week, for clearer signals on the economy.

Broader Asian currencies were muted. The and both weakened slightly, while the weakened back above the 83 level against the dollar.

Indian data is also due later on Friday.

The was flat before the 2024 presidential elections this Saturday, which are expected set the tone for relations with Beijing over the coming years.

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Forex

Dollar bounces after sharp loss; euro retreats on Lagarde comment

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Investing.com – The US dollar edged higher Monday, rebounding after the sharp losses at the end of last week on signs of cooling inflationary pressures, while the euro slipped following dovish comments from ECB head Christine Lagarde.

At 05:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher to 107.750, after falling sharply from a two-year high on Friday.

Dollar bounces after sharp retreat

The dollar bounced Monday after falling sharply on Friday as the Federal Reserve’s preferred showed moderate monthly rises in prices, with a measure of underlying inflation posting its smallest gain in six months. 

That eased some concerns about how much the may cut in 2025, which had risen following the hawkish US rate outlook after the last Fed policy meeting of the year.

That said, traders are pricing in 38 basis points of rate cuts next year, shy of the two 25 bp rate cuts the Fed projected last week, with the market pushing the first easing of 2025 out to June, with a cut in March priced at around 53%.

Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.

Eurozone “very close” to ECB inflation goal

In Europe, fell 0.1% to 1.0414, near a two-year low it touched in November, down 5.5% this year, after European Central Bank President said the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.

“We’re getting very close to that stage when we can declare that we have sustainably brought inflation to our medium-term 2%,” Lagarde said in an interview published by the Financial Times on Monday.

Earlier in December, Lagarde had said the central bank would cut interest rates further if inflation continued to ease towards its 2% target, as curbing growth was no longer necessary.

The lowered its key rate last week for the fourth time this year, and is likely to cut interest rates further in 2025 if inflation worries fade.

traded largely flat at 1.2571, after data showed that Britain’s economy failed to grow in the third quarter, adding to the signs of an economic slowdown.

The Office for National Statistics lowered its estimate for the change in output to 0.0% in the July-to-September period from a previous estimate of 0.1% growth.

The ONS also cut its estimate for growth in the second quarter to 0.4% from a previous 0.5%.

policymakers voted 6-3 to keep interest rates on hold last week, a bigger split than expected, amid worries over a slowing economy.

Yuan hits one-year high

In Asia, rose 0.2% to 156.72, after rising as far as 158 last week following dovish signals from the .

The BOJ signaled that it was not considering interest rate hikes in the near-term despite a recent pick-up in inflation, and could raise rates by as late as March 2025.

edged 0.2% higher to 7.3080, hitting a one-year high as traders continued to fret over China’s economic outlook. While Beijing is expected to ramp up fiscal spending in the coming year to support the economy, looser monetary conditions are expected to undermine the yuan.

 

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Forex

Asia FX muted, dollar slips from 2-yr high on soft inflation data

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Investing.com– Most Asian currencies moved little on Monday, while the dollar steadied from a tumble from over two-year highs after soft U.S. inflation data spurred some hopes that interest rates will still fall in 2025. 

Asian currencies were nursing steep losses against the dollar from last week, although they trimmed some declines on Friday after the soft inflation data. The outlook for regional markets also remains clouded by uncertainty over U.S. interest rates and policy under incoming President Donald Trump. 

Dollar slips from 2-yr high as PCE data misses expectations 

The and both steadied on Monday after clocking sharp losses on Friday.

The greenback slid from an over two-year peak after data- the Federal Reserve’s preferred inflation gauge- read softer-than-expected on Friday. 

Still, the reading remained above the Fed’s 2% annual target, keeping uncertainty over interest rates in play.

The Fed had cut interest rates by 25 basis points last week, but flagged a slower pace of interest rate cuts in the coming year, citing concerns over sticky inflation and resilience in the labor market. 

The Fed is expected to cut rates twice in 2025, although the path of rates still remains uncertain.

Markets took some relief from the government avoiding a shutdown after lawmakers approved an eleventh-hour spending bill.

Asia FX pressured by rate uncertainty 

Despite clocking some gains on Friday, most Asian currencies were still trading lower for December, as the outlook for interest rates remained uncertain.

The Japanese yen’s pair rose 0.1% to around 156.59 yen, after rising as far as 158 yen last week following dovish signals from the Bank of Japan.

The BOJ signaled that it was not considering interest rate hikes in the near-term despite a recent pick-up in inflation, and could raise rates by as late as March 2025. 

The Chinese yuan’s pair rose 0.1%, hitting a one-year high as traders continued to fret over China’s economic outlook. While Beijing is expected to ramp up fiscal spending in the coming year to support the economy, looser monetary conditions are expected to undermine the yuan. 

The Singapore dollar’s pair was flat ahead of inflation data due later in the day, while the South Korea’s won’s pair rose 0.3%.

The Australian dollar’s pair rose slightly after sinking to a two-year low last week. 

The Indian rupee’s pair steadied after hitting a record high of over 85 rupees last week.

 

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Dollar to weaken less than expected next year: UBS

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Investing.com — The dollar recently notched fresh year-to-date highs against its rivals and is likely to remain strong after the Federal Reserve leaned more hawkish at its recent December meeting, analysts from UBS said in a recent note.

“While we still expect the dollar to fall, we now see less weakness in 2025 given these factors and adjust our forecasts slightly,” analysts from UBS said in a recent note.

The less bearish view on the USD comes in the wake of the greenback making fresh year-to-date highs in key exchange rates and the expectations for fewer U.S. rate cuts. 

“The USD has been driven lately by prospects of fewer Fed rate cuts and tariff risks,” the analysts said.

The euro has been particularly affected by dollar strength, but is expected to trade around $1.05 against the greenback in the first half of 2025, the analysts forecast. 

But a significant drop toward parity for the can’t be ruled out, “due to real tariff threats or further divergence in the macro backdrop between the US and Europe,” the analysts added.

Still, any move toward parity should be short-lived, the analysts said, amid expectations for the economic backdrop in Europe to improve in the second half of the year, narrowing the divergence between Europe and U.S. yields. 

“The trajectory back into the middle of the trading range or higher, 1.08 to 1.10, comes with the view that two-year yield differentials will still narrow to some degree and better macro data out of Europe provide some underlying support for EURUSD in 2H25,” the analysts said.

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